21 September 2004
Inventories: Too Much Of A Good Thing
Posted by Zane under: News .
Automotive News reports that as of Sept. 1, U.S. inventories of passenger cars and light trucks climbed to 3.7 million units. That compares with 3.3 million vehicles a year ago, which means that 400,000 additional cars and trucks are sitting around in dealers’ lots and showrooms. I think the auto industry is courting disaster.More From Jerry Flint One day manufacturers will be caught with those huge inventories–when business slumps or the cars won’t move no matter what the incentives. If it happens this fall then the 2005 model year will turn into a catastrophe because the dealers will spend all their time getting rid of the old stuff and the new models will die on the lot.
If it happens at the start of the new calendar year then there will be massive plant shutdowns this coming winter–January and February–which will sink the economy. I’ve seen these things happen.
Detroit’s inventories have been growing for several years because the domestic manufacturers like to run their factories full even if they aren’t retailing cars as fast as they can make them. In recent years the problem has been solved by December “blowout” sales. Lots of retailers use this word, but when a car company has a genuine blowout it means a monster sale–big rebates for customers, and big incentives for dealers and sales people. Companies will do almost anything to get those old cars off the lots.
Yes, the domestics are cutting back some production, but not much so far. Sales in September and October will tell the story. Even if Detroit gets by this year, the industry is on a dangerous road.
Those bloated inventories are a symptom of the problem: The U.S. manufacturers are continually losing ground to foreign nameplates but don’t want to shut plants to match their lower market share.
The conventional wisdom in the U.S. auto industry is that it is better to keep the plants open–and hope to hold onto market share–than it is to shut down a facility. High-seniority workers, which are in abundance in older U.S. auto factories, keep collecting pay and medical benefits even when permanently laid off. That is, until they become old enough to qualify for their pensions.
The current arrangement is particularly tough for General Motors. Thus it overproduces and then tries to push the sales with ever-growing incentives. GM is hoping that an ever-growing market will cover the problem until their cars and trucks get so much better that customers take more of them without so much cash on the table. But these days, the only thing that is growing for GM is inventories.
GM’s strategy has worked so far, but it’s no way to run a business. And the incentives have reached such a point that it’s hard to believe that they can go much higher.
Just look at some of the incentive numbers, furnished by Edmunds.com, an authority on the industry.
In the latest month the average sticker on a Cadillac DeVille was $54,193 but the net price was $42,211, a 22% difference. This means that the factory gives up that much in potential profit through rebates, dealer cash, or lease or interest rate subsidies. And buyers usually get additional discounts from the dealer.
A Ford Motor’s Explorer sticker averaged $33,881 but the net price was $25,745, a 24% difference, or $5,378 in various factory incentives. Those SUVs get harder to sell.
How do you get out of that? By building cars that, in the words of GM Vice Chairman Robert A. “Bob” Lutz, customers “gotta have.” Chrysler’s new 300 seems to be one of those models. A typical sticker for the Chrysler 300 last month was $32,345 versus a net price of $30,574. So Chrysler’s factor incentive was only 5%, or $1,219. And that deal expired.
In this market even the top-tier Japanese manufacturers are cutting their prices, but not as much. A Honda Accord has an average sticker $24,186 and a net of $21,589, or an 11% giveback worth $707 in factory incentives, says Edmunds.
The industry likes to count its stockpile in “days supply,” which measures the inventory for a model divided by the daily selling rate in the past month.
You get some amazing figures when you look at these supply figures: 316 days worth for the Chevy SSR, a $40,000-plus sports truck, which dealers hold for top dollar; 387 days for the Saab 9-2X (just put on sale); and 212 days for the Chrysler Crossfire. And at the other end there’s the Mini Cooper (owned by BMW), with an 8-day supply–700 cars in inventory–because everybody loves the Mini and they aren’t overproduced.
General Motors has 72 days of inventory as of Sept. 1; Ford, 76 days and Chrysler (without Mercedes-Benz), 74 days. The conventional wisdom is that a 60-day supply is fine. Personally, I’ve always thought that 60 days is too high. Toyota Motor is doing great with 32 days. Honda has 34 days.
What Detroit needs–and fast–are cars and trucks that are better in every way: looks, performance, handling, quality and fuel economy. In addition, it is time that capacity is brought into line with demand. This means closing more factories.
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